By Nick Hopkins, CPA, CFP®
Partner, Director of Tax Services
(Part 2 of 4)
In the first part of The Baby Boomer Challenge, we talked about the planning and preparation that should come before retirement. We discussed the questions Boomers should be asking themselves, such as when, where and how they want their post-working life to take shape.
Now it’s time to take a closer look at the financial aspects of retirement planning.
For Boomers’ mom and dad, the old rule of thumb for retirement was that they should plan to live on an income equal to 50% to 60% of their working income. This was usually made up by a combination of Social Security benefits, a company pension plan and perhaps some modest investments.
Times have changed, and those metrics have transformed with them. Fixed pension plans have mostly gone away. The long-term liquidity of Social Security is questionable. Half of your previous income may not fund the lifestyle you desire. So your road map for saving and investing for retirement needs to keep up with reality.
First, analyze what your Social Security benefit would be depending on the age you retire. Look at your 401k or other retirement accounts, and any other investments you have. Sit down with a trusted financial advisor to determine what sort of income these assets will generate during retirement.
Now that you have an estimate of what’s going to be coming in, it’s time to look at the “going out.” As discussed in the last article, you should firm up your idea of how you want to live in retirement. It may include travel, a second home near family or things on your “bucket list.” Some of these things may represent a significant cost, while others are financially nominal.
Finished visualizing? OK, now it’s time to put a dollar amount on all that. Develop a household budget, based on what you’re currently spending and an estimate of what it will be post-retirement.
Make sure to include things like insurance and medical costs in this phase. Healthcare is often one of the biggest expenses as we grow older. Consider getting Medicare supplement insurance or fund a health savings account prior to retirement. Life insurance past a certain age becomes an issue of rising cost versus return. Again, talk to the experts you know and trust.
Now comes the daunting part: seeing how your estimate of income and expenses square up with each other.
Many people who do this exercise immediately recognize a significant shortfall. That’s why it’s important to do planning early on, so you can take action ahead of time.
If you’re still paying off a large mortgage or have a heavy load of credit card debt, that can siphon off a lot of discretionary income during retirement. Initiate a plan — be it for 5, 10 years or more — to eliminate or significantly lower your debt obligations.
Doing this will help crystalize your thinking, and see where your plan may need altering. Perhaps you’ll have to work a year or two longer than expected, or consider part-time work to make up the difference. You might even have to face the prospect that your retirement dreams were a little too “pie in the sky,” and require scaling back.
The point is to start this process as early as possible so you can give yourself choices ahead of time. You don’t want to wait until you’ve filed your retirement paperwork to realize you don’t have the financial security to walk out the door.
The good news is people are living longer and longer. If you’re 65 years old and in good health, it’s not unreasonable to expect to live another 15 or 20 years enjoying life after years of hard work. But the bounty of longevity also means you need to be proactive in putting your financial house in order before retirement.
In next month’s article, we’ll talk about coping with the psychological reality of stepping away from the workplace.
If you to talk to an expert about your financial portfolio in preparation for retirement, please call Nick Hopkins at (317) 608-6695 or email [email protected].